Investment Highlights

• We are downgrading CB Industrial Product Holding (CBIP) from HOLD to SELL with a lower fair value of RM0.95/share (vs. RM1.36/share previously). Our fair value of RM0.95/share is based on an FY19F fully diluted PE of 10x.

• We have reduced CBIP’s FY18E by 31.3% to account for lower project billings and implementation. We have also cut CBIP’s FY19F net profit by 33% to account for a fall in the order book for the mill manufacturing and retro-fitting divisions.

• Year to date, CBIP has secured only RM120mil new mill contracts. In comparison, CBIP received RM221.4mil mill contracts in FY17 and RM250mil contracts in FY16. The unbilled order book of the mill manufacturing division was RM336mil as at end-June 2018 vs. RM444mil as at endMarch 2018.

• CBIP’s 9MFY18 results were below our forecast and consensus estimates. The group’s 3QFY18 results were weak. Net profit declined by 48.3% QoQ to RM9mil in 3QFY18 as pre-tax earnings from the mill manufacturing and special purpose vehicle divisions dived by 29.4% and 57.8% respectively.

• Comparing 9MFY18 against 9MFY17, pre-tax profit of the mill manufacturing division inched up by 1.7% to RM45.1mil. Pre-tax profit margin rose from 18.1% in 9MFY17 to 18.7% in 9MFY18.

• Pre-tax profit of the special purpose vehicle division surged from RM20.8mil in 9MFY17 to RM43.5mil in 9MFY18 in spite of the 39.1% fall in turnover. The increase in earnings was underpinned by higher margins resulting from lower production costs in 9MFY18. Pre-tax profit margin of the division was 36.6% in 9MFY18 vs. 10.7% in 9MFY17.

• Also, CBIP accelerated the completion of projects of the special purpose vehicle division. The bulk of the earnings of these projects was completed and recognised in 2QFY18. This partly contributed to the QoQ fall in the earnings of the division in 3QFY18. Unbilled sales of the unit were RM2mil as at end-June 2018.

• The plantation division’s pre-tax losses narrowed from RM2.5mil in 9MFY17 to RM1.5mil in 9MFY18. CBIP has planted areas of 12,458ha in Kalimantan, Indonesia. The plantation unit is expected to break even in FY19F.

• CBIP swung from a net cash of RM55.2mil as at end-June to a net debt of RM17.2mil as at end-September 2018. Gross borrowings increased from RM45.1mil as at endJune to RM104.4mil as at end-September 2018.

Source: AmInvest Research - 23 Nov 2018